Tuesday 2 December 2008

The curious existence of multinational enterprises

I used to take the structure and presence of multinational enterprises for granted; recent readings have rid me of the prejudice. The literature on them points out that there is nothing inevitable about their existence. A company with a product to sell does not have to set up overseas, but could remain in its domestic market. Even given that profit maximisation might lead it to want to sell as widely as possible, it could export its products to the foreign market without physically being there, or it could sell licenses to a foreign company to manufacture its goods under its brands or using its technology.

The explanations for MNE existence turn on the high knowledge content of the goods they manufacture, where knowledge is understood either to be the explicit scientific, patentable content or the tacit content of a company’s productive organisation. The high knowledge content is a characterising feature of their production; some estimates have found that most of the world’s research and development is done by them.

Within the general recognition of the importance of MNE’s intellectual property, there are several competing explanations for their spread. One emphasises that companies wish to maintain tight control of their intellectual property, and local licensing would put it at risk. Another stresses that because of the high tacit content of goods, only the company itself can efficiently produce its own goods. A third underlines the role of trade barriers to exporting goods instead of local production, partially because countries wish to ensure knowledge spillovers.

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